Returns On Capital At Nahar Spinning Mills (NSE:NAHARSPING) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Nahar Spinning Mills (NSE:NAHARSPING) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Nahar Spinning Mills, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0028 = ₹48m ÷ (₹29b - ₹12b) (Based on the trailing twelve months to March 2024).

Therefore, Nahar Spinning Mills has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 10%.

Check out our latest analysis for Nahar Spinning Mills

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Nahar Spinning Mills' past further, check out this free graph covering Nahar Spinning Mills' past earnings, revenue and cash flow.

So How Is Nahar Spinning Mills' ROCE Trending?

On the surface, the trend of ROCE at Nahar Spinning Mills doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.3% from 15% five years ago. However it looks like Nahar Spinning Mills might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Nahar Spinning Mills has a high ratio of current liabilities to total assets of 40%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Nahar Spinning Mills' ROCE

Bringing it all together, while we're somewhat encouraged by Nahar Spinning Mills' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 402% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Nahar Spinning Mills does have some risks though, and we've spotted 2 warning signs for Nahar Spinning Mills that you might be interested in.

While Nahar Spinning Mills may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com